Effects On Economy:1850 To 1914 Essay, Research Paper

Effects on Trends in Trade Policy from 1850-1914

The modernizing world of 1850-1870 belonged to an age of remarkable growth

in international trade, stimulating the largest free market the world had ever

seen. Yet by 1914, only 30 years later, the trend towards liberal trade policies

had mostly ended, replaced by a revival of the protectionist system. A study of

the variation in trade policies over time shows a remarkable growth in the

power of interest groups to influence the institutional rules and regulations concerning international economic intercourse. The initial major trend can be partly attributed ternational conditions, whereas later trends are more

attributable to the relative strength of the interest groups within individual

nations and their ability to influence institutional policies. It is, however,

necessary to always consider the impact of the international economic situation

on the interest groups, as changes in the international arena often played a

significant role in determining which interest groups held power at any given

time.

A convenient starting point for looking at trends in international commerce

policy is Great Britain. Prior to the British initiative towards free trade, there

were two main barriers to trade, natural and artificial1. Natural barriers were

the long distances to be transversed and the high cost of shipping materials.

Artificial barriers included tariffs and at times direct prohibitions on the import

of certain goods. As the century progressed both barriers fell drastically due to

remarkable advances in technology and through the international leadership of

Great Britain. This lasted until the 1870s initiated the return to protectionism.

Britain, as the first serious pundit for free trade, led the initial trade liberalization

movement for several reasons. First, the philosophical roots which planted the

argument in favor of free trade came to fruition with the publication by Adam

Smith of The Wealth of Nations. This work was quickly expanded upon by

David Ricardo who postulated the concepts of absolute and comparative

advantage, and who showed that every nation involved in trade benefited. The

first group of influential people to accept and use these arguments thus arose in

Britain in the form of the international merchants and industrialists.

Britain in 1832 expanded the franchise to the urban upper middle class, of

whose numbers merchants and industrialists constituted a significant amount.

Thus at the same time the merchants were beginning to advocate a

liberalization of Britain’s trade policy, they were also becoming empowered to

influence the parliamentary rules. Younger politicians intent on simplifying the

government architecture gained power as a result, including Robert Peel and

William Huskisson.

The greatest barrier to free trade in Great Britain in the 1840s were the Corn

Laws. The Corn Laws principally benefited the landed aristocracy, the

strongest group traditionally represented in Parliament. Thus the landed

aristocracy can and should be viewed as an institution as well as a separate

interest group, given their hegemony over policy within the nation for several

centuries. The rise of the merchant classes and the enfranchisement thereof

provided the catalyst necessary to promote a sweeping change of the traditional

policies.

In Britain this political turmoil led to a trend towards free trade and a demand

for the repeal of the Corn Laws by the industrialists and merchants. Richard

Cobden, an industrialist, formed the Anti-Corn Law League2 in 1839 which

created one of the first large scale campaigns to influence public opinion. The

Whig party saw the merchants as a way to gain more control in Parliament, but

failed to win the election in 1841. Tory Sir Robert Peel was elected prime

minister, already intent on making extensive changes in the fiscal system. The

Anti-Corn Law League achieved triumph in 1846, not due to their extensive

propaganda, but thanks to the Irish potato famine. Faced with mass starvation

Peel decided to introduce a bill which would permit the duty free import of grain

within a few years.

In some sense it can be argued that without the Irish famine the era of free

trade would have come substantially later if at all. As an international event it

propelled Great Britain down the path of free trade, and it is significant that the

Whigs, which became the party of the industrialists and merchants, were unable

to attain the repeal of the Corn Laws without a significant catastrophe to aid

them. In the aftermath of the potato famine, the Whigs gained power and

eventually replaced the vast majority of the tariffs with an income tax, making

Britain essentially free trade.

The interplay of events leading Britain towards free trade is also an example of

a major interest group (the merchants and industrialists) taking on the institution

of parliament and the wealthy landowners and setting a new trend in the

nation’s economic policy. With varying interest groups this power struggle

manifest itself in nations throughout Europe, with different results leading to

different trends. It is important to focus not on the institutions as such, but on

which interest groups are capable of influencing the institutions. In the case of

Britain it is doubtful the merchants would have managed to overhaul even small

parts of the fiscal policy had there not been an enlargement of the franchise in

1832.

Paul Bairoch hints that Great Britain may have chosen the free trade policy at

exactly the right time for it to work, and that any other time could well have

been disastrous. He cites the rapid decrease in natural barriers to trade through

greater technological development and the fact that Britain was able and willing

to phase out its agricultural production and come to rely on foreign foodstuffs.

This argument is slightly supported by the onslaught of the Depression in 1873,

discussed later.

In contrast to Britain the industrial interests in most other major industrializing

nations were opposed to liberalization of trade protection. The British stood out

in that they managed to have a comparative advantage in the production of

most manufactured goods at the time. Any large nation which chose to engage

in free trade with Great Britain would therefore see their main industrial

industries annihilated, especially the textiles industry, and be forced to specialize

elsewhere. Nations like France, the United States, the German Zollverein and

Russia were not inclined to abandon their industrial infrastructure to the ravages

of free trade without seeing the potential benefits first.

Thus the trend in Britain, which I have up until now purported to be the main

driving force behind trade deregulation throughout the industrializing world, does

not in and of itself manage to explain the global trend towards deregulation.

There are two other main factors which ensured the success of the British

system of free trade up until the 1870s.

First there is the Cobden-Chevalier treaty of 1860 which revived the concept of

most favored nation, essentially a way of granting any trade concessions made

to one nation to all nations simultaneously. In addition, it paved the way for the

negotiation of a plethora of other trade agreements, leading to a universal

reduction of tariff barriers. This had a dual-effect: due to the tangle of

international treaties it became difficult for any individual nation to hike tariffs,

and it set a precedent for reducing tariffs even in highly protectionist nations

such as France.

A second major factor was the success of Great Britain in pursuing a free trade

doctrine. The general liberal philosophy at the time equated the economic rise of

Great Britain with its free trade policies, and created the belief that failure to

liberalize economically would lead to an inability to compete internationally.

Michel Chevalier wrote about Britain, “When such a powerful and enlightened

nation not only puts such a great principle into practice but is also well known to

have profited by it, how can its emulators fail to follow the same way?” Thus

the governments in power were persuaded by the precedent of Britain to ignore

demands for protection, in some cases detrimentally. Russia for instance saw a

large deterioration of its balance of trade after the 1868 tariff was enacted.

It behooves us to look at other nations at this point to see how international

events and interest groups played a role in determining economic policy. France

is a major exception to the concept that interest groups largely determine a

nation’s trade policy, although most other nations tend to follow this idea.

France had remained highly protectionist up until 1860 for a variety of reasons,

prominent among which was the textile industry as an interest group. Unable to

compete with British producers of textiles, the French industry had managed to

impose a prohibition on the importation of cloth to the French market. The fact

that French industry opposed trade liberalization, in contrast to their British

counterparts, and the continued support for protectionism in the agricultural

sector guaranteed protectionist policies in France.

It took Napoleon III, a supporter of free trade, to pass the Cobden-Chevalier

treaty and move France from a highly protectionist to a medium protectionist

state. Done without the consent of the French Parliament, and as Paul Bairoch

points out, against the will of the majority of the people3, this precedent forced

France to lower its trade barriers for at least 10 years. This is exceptional in

that the interest groups were united in favor of protection and yet lost out. The

inability of the interest groups to exert more substantial power lies in the

structure of the government and the fact that Napoleon III adroitly used a

political loophole to overcome them.

Germany, loosely united in the form of the Zollverein and under the leadership

of Prussia, had a much smaller industrial base compared to a formidable

agricultural sector. Thus the industrial sector was not powerful enough to make

strong demands for high protection in opposition to the interests of other groups.

The Zollverein was very protectionist up until the 1850s, when two factors

contributed to its adoption of more liberal policies (although still protectionist by

comparison to France or England). As mentioned, the agricultural sector was

predominant, and hence preferred lower prices on manufactured good.

Secondly, Prussia wished to retain sole control over the Zollverein and was

fearful of an Austrian attempt to join. Thus by liberalizing trade policy Prussia

hoped to deter a highly protectionist Austria from seeking admittance.

Spain, the Italian customs union, and Russia all relaxed their highly protectionist

laws from 1850 onward as a result of the spectacular economic success of

Great Britain and the ratification of trade agreements with adherence to the

most favored nation clause. Since all had relatively small industrial sectors, the

industrialists as an interest group demanded more protection. Yet due to the

political weakness of the interest groups, and the largely despotic nature of the

regimes as regards trade policy at the time, protectionism was lowered in spite

of the industrial sector. The nations remained generally protectionist, though,

and were in no way leaning towards true free trade.

The small continental European countries moved much more strongly to a

liberal trade doctrine. By virtue of their size, the smaller countries could not

count upon a large endowment factor and thus were forced to specialize earlier

than their larger peers. This created politically stronger interest groups with a

focus on international markets. As it was unnecessary to place tariffs upon

goods for which the nation lacked centers of production, imports and

consequently lower duties were accepted. Additionally, most specialized goods

were intended for export rather than domestic consumption, prompting both

agricultural interest groups (evidenced by the Farmer’s Association in Belgium)

and liberal groups deriving their theory from England joined forces against the

weaker industrial interests to lower duties with some success, notably in the

Netherlands, Denmark, Portugal and Switzerland.

Following 1860, and up until 1879, most nations reduced tariffs, following the

trend begun with the Cobden-Chevalier treaty, much to the detriment of

pro-protectionist interest groups. Whether liberal trade policy benefited nations

other than Great Britain is unclear, and still a point of contention. It must be

noted that nations with more liberal trade agreements often saw a retraction in

the magnitude of industrial growth. Yet the overall growth in European exports

following 1860 shows tremendous gains, of nearly 5.8% per year, and belies

any belief that trade liberalization was detrimental. Given that most nations,

especially the large industrializers, retained substantial tariffs throughout this

period, there is not a clear picture of how large a role liberal trade policies

played in stimulating this growth.

By 1870 the technological advances of sea transportation, combined with the

phenomenal growth of the United States railroad network had opened up the

vast prairie lands in the U.S. to farming. This created a massive export of

cheap wheat and other grains to Europe, which quickly plummeted the majority

of European farmers into a sever crisis. Britain, having already made the

transition from an agricultural nation to an industrial one, felt this depression in

foodstuff prices far less than its more agricultural, continental neighbors.

The reduction in foodstuff prices immediately reversed the political stance of

the powerful agricultural interest groups throughout Europe. In Germany, the

farmers for the first time lent major support to the industrialist interests in

advocating protection and thus paved the way for a precedent setting 1879

tariff which is historically heralded as the return to protectionism.

This new tariff marks, with the exclusion of Great Britain and the Netherlands,

a universal trend to raise tariffs during the years 1880-1914. Once again

international events determined which trends in trade policy were followed. In

the case of the great depression, the United States plays a prominent role in

redefining the trade stances of agricultural interest groups, which combined with

an established push for protectionism on the part of the industrialists soon gave

rise to powerful interest groups. This, in conjunction with several monarchs’

needs for more revenue, facilitated the return to protection.

Institutional fiscal needs were not the main driving force in the return to

protectionism, but did play a significant role. Bismark for example needed to

increase his source of revenue, and used higher tariffs (which had always been

a large source of revenue in Germany anyway) to help achieve his goals.

Nations without strong parliaments, and hence weak bourgeoisie middle classes,

tended to return to protection first. This was facilitated by the facts that the

much larger agricultural interests were suffering from imports and demanding

protection within those nations, and that higher tariffs provided a larger source

of revenue for the monarch (as in the cases of Russia, Austria-Hungary, Spain

and Italy).

By 1892 the Great Depression was beginning to wane and trade relations

between nations moved overall towards a more protectionist stance. The

protectionist movement after 1892 is largely a result of internal interest group

demands, and not a response to overall market depression as the preceding

years had been. Thus the international economic system ceased to play as

dominant a role in determining individual nations’ trade policies, and interest

groups were able to gain more control over the policies adopted.

Germany became the primary leader in leading continental Europe back to

protectionism, largely due to Germany’s increasing commercial power. Caprivi’s

policy of concluding treaties to reduce overall tariffs met with opposition

between 1892 and 1896. By weakening the protections on agriculture, Caprivi

witnessed the farmers’ formation of the Agrarian League (Bund der

Landwirthe), which quickly assimilated the Junkers, creating a powerful interest

group. Through an agreement with the Deutscher Bauernbund and

manufacturers, this group managed to oust Caprivi and catalyzed the passage of

Navigation Laws, leading to an increase in protectionist policy in 1902.

France took far less time than Germany to raise its tariffs after 1892, beginning

with a tariff in 1892 which remained in force until 1910. This period represents

a total political victory for the agriculturalists and manufacturers as interest

groups. The main opposition to higher tariffs came from the Anti-Protectionist

League led by Leon Say, who was unable to stop the rise in protectionism.

Other European nations, many of which had never become as liberal in their

trade policies as France or even Germany, maintained and increased their

existing tariffs. Russia for example introduced a maximum and minimum tariff

system under the direction of Count Witte, and it is largely due to increased

protectionism that Russia industrialized rapidly following 1890. Italy saw a

tremendous increase on agricultural duties in response to that sectors demands

for higher protection, but simultaneously pursued a policy of keeping

manufacturing duties low in order to increase agricultural exports to other

nations.

Austria-Hungary faced growing demands for protection from within the nation

as well. The Hungarian farmers pressured the government to adopt a more

protectionist stance, but without as much success as agricultural interest in

other nations. Even the small nations in Europe adopted more tariffs that they

had previously had, including Denmark, Norway and the already highly

protectionist Sweden and Finland.

Perhaps the most significant role of interest groups in determining foreign trade

policy was played out in Switzerland. The Swiss Consumers’ Union formed a

league against increases in tariffs, supported by the Socialist movement.

However, the manufacturers, the Swiss Union of Craftsmen, and the Swiss

Union of Farmers were able to rally enough support to pass a tariff in 1902

increasing the protectionist policy.

Britain contrastingly stands out through this entire period (1860-1914) as

staunchly anti-protectionist. There were movements in Great Britain to return to

a protectionist policy, beginning with the Fair Trade League which eventually

became the United Empire Trade League. Joseph Chamberlain led the next

interest group crusade with the formation of the Tariff Reform League.

However, the liberals in power counterattacked vehemently and succeeded in

blocking all attempts at levying retaliatory tariffs. It is logical that in Britain the

resistance to protectionism would have remained strong even when faced with

economic stagnation, given that almost all the manufacturers and economists

believed that free trade was the dogma which had propelled Britain to economic

prosperity.

The phenomenal growth in trade over the period 1850-1914, estimated at

25-fold, cannot be explained by any one theory, but rather must be considered

at each moment in its international, national, and even regional aspect. The

often bellicose attempts of the ever more powerful interest groups demanding

representation led to a slow reduction of liberal trade policies in many

continental nations and a return to protectionism. It is important that interest

groups were often unable to achieve their goals without the aid of international

events to support their arguments and force the institutionalized governments to

listen.

Historically the variation in trade policies within this time period sketches many

of the arguments which are still made today. There is no way to study the

modern trends in economic trade policy without hearkening back to Adam

Smith, David Ricardo and the Anti-Corn Law League. It is a fascinating era to

study and learn from, and to hope that mistakes made in the past will not be

repeated by modern political rhetoric.

Bibliography

1) Cameron, Rondo. A Concise Economic History of the World. Oxford

University Press, 1989.

2) Schonhardt-Bailey, Cheryl, et al. Free Trade: The Repeal of the Corn Laws,

pp.xi-xxviii, 132- 138, 331-344. 1996.

3)Bairoch, Paul. “European Trade Policy, 1815-1914,” The Cambridge

Economic History of Europe, Volume 8. Peter Mathias and Sydney Pollard,